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What are Non-Performing Assets (NPAs)? Highlight the measures taken by the government to address the menace of NPAs in India in recent times.
Non-Performing Assets (NPAs) are loans or advances that remain overdue for a period of 90 days or more, wherein the borrower has stopped making interest or principal repayments. NPAs indicate the poor financial health of the banking sector and reflect the inability of borrowers to fulfill their repaRead more
Non-Performing Assets (NPAs) are loans or advances that remain overdue for a period of 90 days or more, wherein the borrower has stopped making interest or principal repayments. NPAs indicate the poor financial health of the banking sector and reflect the inability of borrowers to fulfill their repayment obligations. High levels of NPAs can strain a bank’s profitability and liquidity, thereby affecting the overall stability of the financial system.
Measures Taken by the Indian Government to Address NPAs:
1. Insolvency and Bankruptcy Code (IBC), 2016: The IBC was introduced to provide a time-bound resolution process for distressed assets. It streamlines the process of bankruptcy and insolvency, making it easier to recover bad loans. This has been a critical step in addressing NPAs by ensuring faster resolution and recovery.
2. Formation of Bad Bank: The establishment of the National Asset Reconstruction Company Limited (NARCL) or ‘Bad Bank’ aims to aggregate and consolidate stressed assets for efficient resolution. The government’s move to set up this entity helps in cleaning up the balance sheets of banks by transferring NPAs to the bad bank for focused resolution.
3. Recapitalization of Public Sector Banks (PSBs): The government has infused significant capital into PSBs to strengthen their balance sheets and enhance their capacity to lend. This recapitalization helps banks to provision for NPAs and absorb losses, thereby improving their financial health.
4. Strengthening Regulatory Framework: The Reserve Bank of India (RBI) has introduced several measures, such as the Prompt Corrective Action (PCA) framework, which imposes restrictions on banks with high NPAs to prevent further deterioration. The RBI also introduced the revised framework for the resolution of stressed assets to ensure early identification and resolution.
5. Asset Quality Review (AQR): The RBI conducted an AQR to identify and acknowledge the extent of NPAs in the banking system. This initiative brought transparency and prompted banks to recognize stressed assets promptly.
6. Pradhan Mantri Jan Dhan Yojana (PMJDY): While not directly targeting NPAs, the PMJDY promotes financial inclusion and responsible lending. By bringing more people into the formal banking sector, it aims to reduce the incidence of default due to better access to banking services and financial literacy.
7. Corporate Governance Reforms: The government has emphasized improving corporate governance within banks. Measures include strengthening the functioning of the boards of banks and ensuring better risk management practices.
These measures collectively aim to address the menace of NPAs by enhancing the resolution mechanisms, strengthening the regulatory environment, and improving the financial health and governance of banks in India.
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